Wednesday 13 December 2017

ECB under new pressure as moves do not calm markets

ECB president Jean-Claude Trichet. Photo: Getty Images
ECB president Jean-Claude Trichet. Photo: Getty Images reporters

European shares touched new lows today as fears for a eurozone debt spiral continued and moves by the European Central Bank (ECB) failed to calm markets.

London’s FTSE finished down 3pc and Germany’s DAX fell even further as concerns also grew for the US economy which is also under pressure.

INDEPENDENT BLOG: Italy is too big to save

Shares in Italy's biggest international bank, UniCredit, were suspended temporarily to stop already panicked investors from pushing prices down further.

In the US, the Dow Jones was off more than 2pc in early trade.

The ECB was forced to reactivate its Government bond purchase programme in a bid to calm bond and stock markets as the focus switched to the European debt crisis which is now engulfing Italy and Spain.

ECB President Jean Claude Trichet told reporters in Frankfurt that the bank has already begun buying eurozone Government bonds in the markets this afternoon but it is understood that this is restricted Ireland and Portugal.

He also announced additional six month liquidity support for European banks – many of which have exposure to Italian or Greek sovereign debt.

“The governing council today decided to conduct a liquidity providing supplementary longer term refinancing operation (LTRO) with a maturity of approximately six months,” he said.

But economists said the ECB is not doing enough to quell market fears.

“The ad-hoc provision of extra liquidity announced today is helpful in the short term but it is not enough to stem the current crisis,” said Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast (EEF).

“Trichet was careful to highlight that the bond purchase programme was active, surely to leave the door open to purchases in the future.

“But by being so reluctant to embrace this policy the ECB is undermining its effectiveness since financial markets cannot rely on the ECB acting as a lender of last resort to governments.”

She added that should tensions on Spanish and Italian bond markets escalate further, it is far from certain that an adequate policy response would be quick enough to prevent the eurozone from being engulfed in a crisis that could push the economy back into deep recession.”

Speculation is growing in Brussels that the current €440bn bailout fund will have to be increased significantly.

Earlier today the European Commission President Jose Manuel Barroso admitted that last month’s plan to save the continent from a debt crisis following the second Greek bailout had failed to convince investors.

However, he stopped short of admitting his intervention this week to push leaders to endorse changes to the new plan is related to Italy and Spain’s current situation with their cost of borrowing coming close to bailout levels.

“Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery,” he said in a letter to the 17 eurozone leaders.

He also urged EU leaders to reform the European Financial Stability Facility (EFSF bailout fund) as soon as possible in an effort to settle bond markets.

Leaders last month agreed to give the EFSF powers to intervene in secondary bond markets and to pump money into troubled banks through government loans to countries.

However, EU governments have yet to endorse the measures at a national level.

Mr Barroso warned that the "bold decisions" taken on the Greek package and on the increased flexibility of the EFSF are "not having their intended effect on the markets".

In the past two days, the cost of borrowing for both Italy and Spain is now over 6pc – 7pc is considered bailout territory.

Last month, eurozone leaders agreed a new €109bn bailout package for Greece and also agreed the increased powers for the EFSF which will replace the current European Stability Mechanism in 2013.

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